VC Perspectives from a Former Entrepreneur – Jeff Bussgang

Navigation

Monthly Archives: February 2009

I love Thomas Friedman. I was first exposed to him when he was the NY Times Jerusalem bureau chief and wrote a terrific book on the Middle East, From Beirut To Jerusalem. Since then, he's become more famous and influential in economic matters through his book, The World is Flat.

So I was perplexed and dismayed when I read his editorial in today's NY Times: "Start Up The Risk-Takers". In it, he suggests a silly stimulus idea – "Call up the top 20 venture capital firms in America, which are short of cash today…and make them this offer: The US Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way."

There are numerous reasons this is a dumb and impractical idea. Friedman threw out another dumb idea a few weeks ago in an editorial titled "The Open Door Bailout". In this article he opines: "I would have loved to have seen the stimulus package include a government-funded venture capital bank to help finance all the start-ups that are clearly not starting up today — in the clean-energy space they’re dying like flies — because of a lack of liquidity from traditional lending sources."

Government funds for the VC industry is simply unnecessary. At $30 billion per year, there is no lack of VC capital being deployed in America. The bottleneck in the VC-entrepreneurship equation isn't in the inputs of capital, it's in the outputs. The lack of exits and the dearth of the IPO market is what needs to be fixed to open the floodgates of innovation.

But then I thought – let's not go overboard with our criticism by taking Friedman literally. The guy's a huge fan of global entrepreneurship (I loved it when he referred to the worthy work of the global non-profit, Endeavor, as the "best anti-poverty program of all"). His heart and priorities are in the right place.

So before folks get up in arms about "bailing out VCs", let's take Friedman's comments figuratively. He's dead on when he points out that entrepreneurship is what is going to get us out of this mess. The government shouldn't focus on silly notions of VC subsidies that nobody wants. Instead, the policy agenda to foster entrepreneurship and the flow of capital to entrepreneurs is very clear. The National Venture Capital Association (NVCA) laid it out nicely in a crisply worded memo to the Obama transition team. Policy makers need to focus on three things:

1) Reform Sarbanes-Oxley. We need to fix this terrible piece of legislation which has created a terrible IPO bottleneck. If VCs can't get good companies public, they will dramatically slow down their investment pace. In my view, this is the single largest issue in hindering American entrepreneuship.

2) Increase the number of H1-B Visas. This was Friedman's main point, by the way, in his earlier editorial when he called for the VC bailout, so let's give him his due as he's been beating the drum on this important issue for years. Let's allow ourselves to continue to be a talent magnet for the world's best talent.

3) Keep capital gains taxes low. The government should look elsewhere for incremental revenue sources. Gas taxes are smart because they have the dual benefit of reducing gas consumption (Governor Deval Patrick is appropriately pushing this forward in Massachusetts). Increasing capital gains taxes will reduce productive capital investment and should be avoided like the plague.

So let's not slam Friedman, but instead let's harness his passionate support for innovation and entrepreneurship and, as Rahm Emanuel famously observed, not let a good crisis go to waste.

Like this:

In that 1984 classic, Revenge of the Nerds, a group of outcasts and misfits fight back against their better-looking, "cool" rivals, ultimately winning the girls and glory.

I was reminded of the movie over breakfast this morning with the CEO of one of the major ad agencies. Just as you'd expect a high-powered agency executive to be, he was smooth, smart, suave and urbane. But his industry is under siege from the Nerds. On one side, he has techno-media companies like Google, Yahoo and MSN using technology and data to eat into the traditional ad agency value chain. On the other side, he has advertisers like P&G, Ford and Coca Cola demanding more sophisticated targeting and effectiveness for their incremental ad dollars – no longer accepting the old way of doing business over a three martini lunch. The stakes are getting higher: Think Equity estimates the global online advertising market will be north of $40 billion in 2009 and still growing at 15-20% per annum while TV remains flat and radio and newspapers suffer.

And so Madison Avenue's chic "Mad Men" are under siege. And the Nerds seem to be winning.

But the cool guys are fighting back. If you can't beat 'em, join 'em.

They are buying technology companies (witness WPP's acquisition of 24×7 and Publicis' acquisition of Digitas) and embracing the digital world in spades. This CEO, for example, talked to me about three Nerd-like priorities: striking the right technology partnerships (typically with start-ups, like the new one I'm funding in this space), hiring the right in-house technical resources, and wresting control of the data from the publishers.

This final point struck me as a very intersting one. Ad Age reported this week on the gauntlet that has been thrown down by GroupM, WPP's major media buying organization. The agencies are wising up to the value of the data in online advertising and are trying to regain control over it. In many cases, the data can be more valuable than the actual served ad itself. Thus, Group M and other agencies are changing their contracts to tighten up the ownership of the data and prevent ad networks, publishers and the techno-media firms to use the data for their own profit purposes.Soon, agencies may disaggregate buying media from buying data – in other words, there may be data insertion orders placed right next to media insertion orders. This would put a specific price and explicit rights control on the data.

But the cultural change required is perhaps the most difficult one for these large ad agencies. How will the agencies compete for great technical talent and recruit and retain innovative entrepreneurs? Will they be able to outsource some of the technical capabilities that their clients are demanding (e.g., with the likes of digitalArbor)? And who will win in this battle to own all this incredible data being collected on consumer behavior?

If I remember correctly, the Nerds won in the first movie, as well as in Revene of the Nerds II. Maybe Madison Avenue needs to make a third sequel: "Revenge of the Mad Men".

Like this:

Billed as "Silicon Valley meets Madison Avenue", today's AlwaysOn conference in NYC was somewhat reassuring. Attendence was up from previous years and attendees were there to do business – raise money, look for deals, develop partnerships.

A few highlights:

Ad Networks 3.0: panelists argued that there remained a huge opportunity, despite investor fatigue in yet another ad network. Elizabeth Blair, CEO of Brand.net, pointed out that although 30% of direct response advertising dollars had already moved online, only 5% of brand dollars had made the shift, despite consumer reporting that they spend 40% of their time online. That said, there was clamoring for some way to use data to improve CPMs, particularly for non-premium inventory.

Mobile Advertising: panelists laid out the case for why the iPhone was transformational for mobile advertising and that early trials suggest mobile advertising actually works. That said, they were realistic about the slow growth ahead as mobile works its way into the marketing mix, particularly as a component in cross-platform campaigns.

Brian Wieser of Magna gave a great keynote, providing overwhelming data to suggest TV isn't dead yet. "TV dwarfs other media in reach and frequency," he argued. The data was compelling. For example, 97% of adults 18-49 turn on the television every week, the same as 10 years ago, and viewing hours is actually growing, now standing at 500 billion person hours (side note: who the heck is watching 4 hours of TV / day?? That's the AVERAGE consumption!). Further, even if online video grows at a rate of 35% (roughly the current rate), TV will still represent 100x more hours in 2011! A sobering view in the world of, as Wieser put it, "Web 2.0%".

Smartphone: this panel was simply an hour long raving lovefest for the iPhone. Favorite iPhone apps mentioned ranged from the sublime (Amazon, Pandora) to the ridiculous (iFart, iThrow, iFu Kung Fu). Eric Litman, CEO of Medialets, amusingly pointed out that there are 20 million Windows Mobile devices, but application discovery is such an awful experience that the download rates are a fraction of the iPhones.

VC Outlook: Jonathan Miller (Velocity, ex-CEO AOL), Woody Benson (Prism) and I did a panel on the VC outlook. We tried to provide a balanced view – I think we were all relatively balanced as short-term bears, but long-term bulls. As Woody pointed out, "You can't do what I do unless you're an optimist. Otherwise, you'd jump out the window!"

But the real highlight of the day for me personally was closing the New York Stock Exchange (NYSE) – an honor that Tony Perkins was kind enough to make available to me. Lucky for me the market was up today (Tony quipped that he should change the name of the conference to Always Up)!